Social Norms, Information, and Trust among Strangers: An Experimental Study

Trust and reciprocity have been recognized as a means of reducing transaction cost and achieving mutually beneficial outcomes when legal contracts and third-party enforcement are absent or too costly. Some economic activities require trust and reciprocity among agents who are not familiar with each other and only have economic interactions at randomly determined times. One example is e-commerce transactions. In online markets, agents are essentially anonymous, and transactions take place between strangers who have no contact except through cyberspace. Usually the buyer needs to make the payment first, and then the seller delivers the item. If it is a one-shot transaction, a self-interested seller has an incentive to deliver nothing or an item far less valuable than promised, and a rational buyer will not send the payment in the first place. We observe, however, millions of transactions every day on the Internet. Another example is the credit market. The credit card company needs to trust the consumer’s accountability to repay the credit, especially when the consumer is new to the market. On the other hand, we observe in both markets that there is an information system that records and disseminates information about agents’ transaction history. For example, many online markets employ the “feedback” mechanism, and most credit card companies share information about consumers’ credit history. This paper reports the findings of an experiment which uses a similar environment to the one described above; that is, subjects are completely anonymous and randomly matched with each other to play a trust game in each period. We provide evidence to answer the questions of whether or not the social norm of trust and reciprocity can be sustained in this environment, and whether or not information is effective and necessary to sustain the social norm of trust and reciprocity. Previous literature on repeated games (Fudenberg and Maskin, 1986) shows that any mutually beneficial outcome can be sustained as a subgame perfect equilibrium if the same set of players plays the same stage game ad infinitum. In this case, reputation is an effective means of enforcing cooperative behavior. When each agent is anonymous and interacts only at randomly determined times with any other particular agent in the finite population, Kandori (1992) shows that the social norm of cooperation can be sustained as a sequential equilibrium in the Prisoners’ dilemma game, if the deviation triggers a contagious reaction and the consequence of the eventual destruction of the norm is sufficiently severe. Lee and Xie (2007) theoretically extend Kandori’s (1992) results to the trust game